Sapphire Fibres Limited (PSX: SFL) was incorporated in Pakistan as a public limited company in 1979. The principal activity of the company is the manufacturing and sale of yarn, fabric and garments.

Pattern of Shareholding

As of June 30, 2023, SFL has a total of 20.672 million shares outstanding which are held by 622 shareholders. Associated companies, undertaking and related parties have the majority stake of 53.79 percent in the company followed by local general public holding 26.033 percent shares of SFL. Directors, CEO, their spouse and minor children account for 13.62 percent shares of the company while NIT & ICP hold 2.98 percent shares. Around 1.21 percent of SFL’s shares are held by insurance companies. The remaining shares are held by other categories of shareholders.

Financial Performance (2019-23)

SFL’s topline has been riding an upward trajectory over the period under consideration. Conversely, its bottomline witnessed a dip twice during the period i.e. in 2019 and 2023. SFL’s margins portray an asymmetrical pattern whereby its gross margin improved in 2019 while its operating and net margins considerably declined. In 2020, gross margin plunged while operating and net margins strengthened. In 2021 and 2022, SFL’s margins boasted incredible growth to hit their highest level in 2022. However, the margins registered a decline in 2023. The detailed performance review of the period under consideration is given below.

In 2019, SFL’s topline grew by 22 percent year-on-year. As of June 30, 2019, 80.9 percent of the company’s net revenue comprised of export sales. The growth in export sales during the year was mainly the consequence of Pak Rupee depreciation as elevated cost of sales due to high energy cost and soaring inflation took its toll on SFL’s international market share. Declining value of local currency resulted in a higher GP margin of 13.2 percent in 2019 versus 10.2 percent in 2018. Distribution expense multiplied by 22.12 percent in 2019 primarily due to high freight & forwarding charges incurred during the year. Administrative expense inched up by 3.18 percent in 2019 on account of higher payroll expense. SFL enhanced its workforce from 3833 employees in 2018 to 3975 employees in 2019. Other income dwindled by 62.65 percent year-on-year in 2019 due to suppression of dividend income particularly from related parties. Other expense also contracted by 51.42 percent in 2019 due to lower profit related provisioning and a dip in provisioning on doubtful tax refunds. SFL posted 4.44 percent higher operating profit in 2019, however, OP margin fell from 12.2 percent in 2018 to 10.5 percent in 2019. Finance cost escalated by 72.26 percent in 2019 on account of higher discount rate and increased working capital related borrowings obtained during the year. SFL’s gearing ratio climbed up from 46 percent in 2018 to 51 percent in 2019. Net profit shrank by 33.7 percent in 2019 to clock in at Rs.759.197 million with EPS of Rs.36.72 versus EPS of Rs.58.16 recorded in 2018. NP margin slid from 6.4 percent in 2018 to 3.5 percent in 2019.

In 2020, SFL’s net revenues grew by 3.41 percent year-on-year. Due to outbreak of COVID-19, businesses, both locally and internationally, greatly suffered. Lockdown imposed during the year didn’t allow the company’s fixed cost to be absorbed effectively, resulting in 1.42 percent slide in gross profit in 2020. GP margin also inched down to 12.6 percent in 2020. Distribution expense multiplied by 17.39 percent in 2020 due to higher freight & forwarding charges and sales promotion expense incurred during the year. 6.11 percent higher administrative expense incurred during the year was the consequence of increased payroll expense as the company continued to expand its workforce to 4192 employees in 2020. 172.52 percent year-on-year rise in other income proved to be a blessing for SFL in 2020. This came on the back of robust dividend income received from related parties in 2020. Other expense grew by 40.82 percent in 2020 on the back of increased provisioning for WWF and WPPF and also re-measurement loss on foreign currency commitments. SFL’s operating profit strengthened by 30.56 percent year-on-year in 2020 with OP margin climbing up to 13.2 percent. Finance cost surged by 15.92 percent in 2020 due to higher discount rate. SFL’s gearing ratio moved down to 48 percent in 2020. Net profit rose by 48.23 percent year-on-year in 2020 to clock in at Rs.1125.32 million with EPS of Rs.55.61 and NP margin of 5 percent.

SFL recorded 22.41 percent higher net sales in 2021. This was on account of splendid rebound in both local and export sales after COVID-19. Increased volume, upward price revision and operational efficiencies gained during the year translated into 39.54 percent higher gross profit in 2021 with GP margin flying up to 14.3 percent. Distribution expense hiked by 24.84 percent in 2021 due to higher sales commission, freight & forwarding charges and sales promotion expense incurred during the year. During the year, the company hired additional human resources which took up its workforce to 4752 employees, resulting in higher payroll expense. This coupled with bigger legal & professional charges as well as fee & subscription charges incurred during the year drove up administrative expense by 12 percent in 2021. Other income slid by 13.73 percent in 2021 due to lower dividend income which overshadowed the impact of superior gain recorded on disposal of fixed assets in 2021. Higher profit related provisioning was partially offset by the absence of provision for doubtful tax refunds and re-measurement loss on foreign currency commitments. This resulted in 5 percent uptick in other expense in 2021. SFL’s operating profit enhanced by 22.26 percent in 2021 with its OP margin staying afloat at 13.2 percent. Finance cost was squeezed by 34.21 percent in 2021 on the back of monetary easing. Gearing ratio also inched down to 47 percent in 2021. SFL registered a staggering 102.04 percent year-on-year rise in its net profit in 2021 which clocked in at Rs.2273.56 million with EPS of Rs.109.98 and NP margin of 8.3 percent.

In 2022, SFL recorded further 58.5 percent rebound in its net sales. While local sales remained lackluster, export sales registered 71.7 percent rise in 2022, grabbing 87.9 percent share in the total sales mix of SFL, compared to 81 percent share in the previous year. Pak Rupee depreciation played a tremendous role in driving up the export sales and boosting the company’s margins during the year. The company recorded 161 percent year-on-year rise in its gross profit in 2022 with GP margin attaining its peak of 23.6 percent. Distribution expense multiplied by a massive 91.74 percent in 2022 due to drastic hike in export commission as well as freight & forwarding charges. Administrative expense also surged by 25.66 percent in 2022 due to high payroll expense due to workforce enhancement. SFL’s workforce comprised of 4844 employees in 2022. Other income strengthened by 15 percent in 2022 due to higher dividend earned from unrelated companies. Other expense surged by 311.78 percent in 2022 due to escalation in the provisioning made for WWF, WPPF and doubtful tax refunds. Operating profit improved by 139.95 percent in 2022 with OP margin climbing up to 20 percent. 73.7 percent year-on-year spike in finance cost in 2022 was the consequence of monetary tightening. Gearing ratio marched down to 43 percent in 2022 on account of increased equity. SFL posted 173.38 percent growth in its net profit in 2022 which clocked in at Rs.6215.45 million with EPS of Rs.300.67 and NP margin of 14.2 percent.

The magnitude of topline growth which surged to 58.5 percent in 2022 dwindled to 6.44 percent in 2023. This was due to slowdown of global demand on account of recession in the major export destinations coupled with strict import controls in the local market. Processing and garments division still managed to bag 52.9 percent increase in sales, however, it was offset by sales decline in spinning and denim divisions. High cost of sales due to Pak Rupee depreciation and hike in raw material and conversion cost resulted in 13.33 percent plunge in gross profit in 2023 with GP margin shrinking to 19.2 percent. Distribution expense tumbled by 3.69 percent in 2023 due to lesser export commission and freight charges on the back of lackluster off-take. Administrative expense increased by 12.53 percent in 2023 due to higher payroll expense. This was despite the fact that the company streamlined its workforce to 4525 employees in 2023. Other income grew by 36.96 percent in 2023 on account of higher dividend income from related parties, higher mark-up on loan to related parties as well as exchange gain and reversal of provision on doubtful tax refunds. Other expense also plummeted by 35.29 percent in 2023 due to lesser profit related provisioning. SFL recorded 7.42 percent lower operating profit in 2023 with its OP margin moving down to 17.4 percent. Finance cost grew by 18.63 percent in 2023 due to higher discount rate. This was despite the fact that the company considerably squeezed its debt profile during the year which resulted in a gearing ratio of 34 percent in 2023. Despite all the efforts to rationalize its outlays, SFL net profit tumbled by 17.61 percent in 2023 to clock in at Rs.5120.787 million with EPS of Rs.247.72 and NP margin of 11 percent.

Recent Performance (9MFY24)

SFL’s net sales inched up by a paltry 4.79 percent in 9MFY24. This was on account of weak demand in both local and export market on account of decline in the purchasing power of consumers. Cost of sales hiked by 15.46 percent during the period resulting in 37.2 percent lower gross profit in 9MFY24 with GP margin of 12.1 percent versus 20.3 percent during the same period last year. Distribution expense ticked down by 9.06 percent in 9MFY24 due to sluggish sales volume. Conversely, high inflation continued to drive up administrative expense which posted 16.67 percent hike in 9MFY24. SFL curtailed its profit related provisioning and registered 78.84 percent lower other expense in 9MFY24. Other income greatly buttressed the financial performance of SFL during the period. 54.71 percent higher other income recorded by SFL in 9MFY24 mainly comprised of dividend income from Sapphire Electric Company Limited, a subsidiary of SFL. Despite robust other income, SFL’s operating profit inched down by 22.13 percent in 9MFY24 with its OP margin clocking in at 13.9 percent which although was lower than the OP margin of 18.8 percent recorded by the company in 9MFY23, however, was higher than the GP margin for the current period. Finance cost built up by 62.31 percent in 9MFY24 due to high discount rate and increased running finances obtained during the period. SFL’s net profit slumped by 60.86 percent year-on-year in 9MFY24 to clock in at Rs.1677.45 million with EPS of Rs.81.15 versus EPS of Rs.207.33 recorded by the company in 9MFY23. NP margin also moved down from 12.8 percent in 9MFY23 to 4.8 percent in 9MFY24.

Future Outlook

With improved domestic cotton availability and demand recovery in the value-added textile segment on account of restrictions imposed on China and high cost of Bangladeshi apparels, Pakistan’s textile sector is pinning hopes for revival.